Michael Gershberg is a Partner and Justin Schenck is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Gershberg and Mr. Schenck. Additional posts addressing legal and financial implications of the Trump administration are available here.

On September 13, 2017, President Trump issued an Executive Order blocking the $1.3 billion acquisition of a U.S. semiconductor manufacturer, Lattice Semiconductor Corporation (“Lattice”), by a Chinese government-backed private equity fund, Canyon Bridge Capital Partners (“Canyon Bridge”). The order followed a recommendation from the Committee on Foreign Investment in the United States (“CFIUS”) that the transaction posed a risk to national security. This marks only the fourth time that a U.S. President has ordered a transaction blocked or unwound due to national security concerns, although it is the second blocked Chinese acquisition of a U.S. chipmaker within a year (President Obama blocked a Chinese acquisition of the U.S. business of German semiconductor company Aixtron SE in December 2016). This development reflects the recent enhanced scrutiny by the U.S. government of Chinese investment in U.S. business, particularly in the high-tech and semiconductor industries. More generally, it is a reminder of the uncertainty of current U.S. foreign investment policy and the regulatory risks facing certain transactions by foreign buyers.

The Lattice/Canyon Bridge Transaction

The acquisition of Lattice by Canyon Bridge was announced in November 2016 for a total purchase price of $1.3 billion. The parties filed with CFIUS on or around December 28, 2016, only weeks after President Obama issued an executive order blocking the Chinese acquisition of Aixtron. The notice was withdrawn and refiled to allow more time for review and discussion between the parties and CFIUS on or around March 24, 2017 and June 9, 2017. The transaction eventually went through three rounds of CFIUS investigation. The previously-rare approach of voluntarily withdrawing and refiling a CFIUS notice has become much more common under the Trump administration. Whether due to staffing shortages or deliberate policy, there have been a number of recent transactions that CFIUS has been unable to resolve within the normal investigation period. There are currently several deals—mostly, but not exclusively, Chinese acquisitions—that have been pending before CFIUS for many months, attempting to reach a resolution.

On September 1, 2017, Lattice disclosed in an SEC filing that CFIUS had informed the parties that it intended to recommend that the President block the transaction. In the same filing, Lattice indicated that the parties had proposed “comprehensive mitigation measures” and that it had taken the unconventional approach of appealing to the President for approval. In the vast majority of cases when CFIUS recommends blocking a deal, the parties voluntarily withdraw their notice and abandon the transaction to avoid a near-certain public order from the President blocking the deal. However, Lattice, like Aixtron before it, sent the case to the President for final disposition, believing that it had solid arguments that might persuade the President on a political level. Canyon Bridge reportedly committed to doubling Lattice’s U.S. employees, presumably to make the deal more attractive to U.S. decision-makers as an economic matter.

Lattice’s gamble was unsuccessful. President Trump’s order stated that he had been presented with credible evidence that Canyon Bridge might “take action that threatens to impair the national security of the United States” through its control of Lattice. CFIUS chairman and Secretary of the Treasury Steven T. Mnuchin also issued a press release discussing the blocked transaction. Mnuchin highlighted four national security concerns with the transactions:

the potential transfer of Lattice’s intellectual property to Canyon Bridge

the role of the Chinese government in the transaction

the importance of the semiconductor supply chain to the U.S. government

the U.S. government’s use of Lattice products

CFIUS and Chinese Investment in the U.S. Semiconductor Industry

The factors articulated by Secretary Mnuchin have been at play in other scuttled semiconductor deals. There has been a pattern of Chinese acquisitions of U.S. and other Western semiconductor companies in recent years. CFIUS has heavily scrutinized these deals, which appear to be part of a Chinese government-backed approach to acquire—rather than develop—an advanced semiconductor industry. CFIUS is concerned in particular with the transfer of technology to China that may have military applications, as well as foreign control over an industry of strategic importance to the United States. In addition, CFIUS has an interest in the security of the supply chain in this sector because many semiconductors are ultimately used by the U.S. government and military.

More generally, President Trump’s action furthers the perception that CFIUS has grown increasingly hostile to foreign acquisitions in high-tech deals, particularly those involving Chinese acquirers. Several high-profile transactions have been abandoned in recent years as a result of CFIUS risk or opposition, in addition to the blocking of the Aixtron transaction. These include Royal Philips’s sale of a controlling interest in its Lumileds business to a Chinese buyer, Fairchild Semiconductor’s rejection of a Chinese acquisition offer due to CFIUS risk, HNA Group’s proposed acquisition of Global Eagle Entertainment Inc., and T.C.L. Industries Holdings’s proposed purchase of Inseego Corp.

Additionally, several high-profile Chinese acquisitions remain in limbo after withdrawing and refiling notices before CFIUS, sometimes more than once. For example, HNA Group’s proposed acquisition of SkyBridge Capital LLC and Ant Financial’s proposed acquisition of MoneyGram International Inc. both remain pending, among other deals. President Trump’s action does not bode well for these long-pending transactions. It also serves as a warning that CFIUS is likely to block any future Chinese acquisitions of U.S. chipmakers, and will likely discourage parties from viewing an appeal to the President as a viable path to saving a transaction that is threatened by CFIUS.

Conclusion

Although the official ambit of CFIUS is limited to national security considerations, it is notable that CFIUS has become more unreceptive to Chinese acquisitions during the early Trump administration. President Trump, both on the campaign trail and as President, has questioned China’s role in the U.S. economy. There is anecdotal evidence that CFIUS has begun to consider economic and even political issues, along with traditional national security concerns, when evaluating transactions. In fact, among the recent calls to reform CFIUS (and potentially in legislation expected to be introduced soon), there are suggestions to explicitly include economic factors in CFIUS’s decision-making. However, Secretary Mnuchin emphasized in CFIUS’s press release that “Consistent with the longstanding, bi-partisan U.S. commitment to open investment, the CFIUS process focuses exclusively on identifying and addressing national security concerns.” This is a notable statement from the administration and provides some comfort that CFIUS is not being used as an economic or political tool of policy-making. Nevertheless, it remains the case that CFIUS is an important regulatory risk factor to consider in many acquisitions involving sensitive businesses or buyers.

President Trump Blocks Chinese Acquisition of Lattice Semiconductor Corporation 2017-09-24T09:53:02-04:00 2017-09-24T09:53:02-04:00Harvard Law School Forum on Corporate Governance and Financial Regulation